Until recently, the region – excluding Russia, which
is generally seen as a separate market – had shrunk
in investors’ eyes to just two locations:
Poland, famously the only country in Europe to escape
recession in 2009 and boasting a supportive investment
climate, absorbed as much as three-quarters of international
flows; while the vast majority of the remainder was directed
to Prague.

The past six months, however, have seen a dramatic
widening of investors’ horizons. While Poland is
still attracting substantial interest, and is on course for
its best year since 2006, the rest of the region is finally
starting to play catch-up.

In the first half of the year, just 50% of flows into CEE
went into Polish assets, according to Jones Lang LaSalle
(JLL). A further 25% went to the Czech Republic –
including, but no longer limited to, Prague – while
Romania and Hungary attracted 15% and 8% respectively.

According to Jos Tromp, head of CEE research and
consulting at CBRE, this expansion of interest has been
driven by a combination of the improving economic performance
of countries such as Romania and Hungary – both of
which, along with their real-estate markets, suffered badly
in the financial crisis – and a shortage of
investment opportunities in the most popular locations.

"Poland has been the investment sweetheart of central
Europe in recent years, particularly for equity-driven
investors, and as a result it has become increasingly
difficult to acquire good quality assets," he says.

Also skewing the imbalance between supply and demand, say
analysts, are the high levels of liquidity spilling over from
western Europe into CEE in search of yield – "there
is more equity in the market now than there was at the peak
in 2007," says Tromp – and the growing proportion of
assets in the region held by long-term investors.

The Prague market has traditionally been characterized by
a high percentage of buy-to-hold investors, but this trend is
now expanding to include the rest of CEE. The shopping-centre
industry has seen most of its top assets snapped up by
long-term buyers, while a similar process is now under way in
the industrial and logistics sector.

This, in turn, reflects the changing nature of the
investor base and investment strategies in the region, says
Troy Javaher, head of capital markets CEE at JLL.

"Whereas two years ago, investors were looking for prime,
risk-averse opportunities on a much smaller scale, now the
focus for many funds is on acquiring portfolios or ideally
entering into a partnership with a proven platform, and doing
it on a scale that allows them to rapidly get a footprint in
several countries," he says.

Gaining scale, he adds, also gives investors the
opportunity to consider different types of exit – a
consideration that is particularly important to the
increasing number of big North American funds getting
involved in CEE.

These include, most notably, Blackstone, which has been on
a shopping spree in the region this summer, buying more than
€540 million of assets in three transactions through its
European logistics platform Logicor.

Fellow US funds BlackRock and Lone Star have also moved
into CEE, as have Canadian pension behemoth PSP Investments
and the Canadian Pension Plan Investment Board, and the
region has started to attract interest from further
afield.

Javaher reports that the €1.6 billion CTP
industrial/logistics portfolio, being marketed by JLL, has
caught the eye of buyers in the Middle East and Asia as well
as North America.

The terms are not great, but they are
improving, and we
were seeing very little new lending even 18 months
ago

Troy Javaher

On the debt-finance side, market participants report
similar trends, in terms of the volumes on offer and the
markets for which funding is available.

"Debt financing has always been very solid in Poland and
there is also a fair amount of liquidity in Czech Republic,
but we are starting to see banks returning to real-estate
lending in Romania and Hungary," says Javaher. "The terms are
not great, but they are improving, and we were seeing very
little new lending even 18 months ago."

Robert Sztemberg, head of corporate finance at JLL Poland,
adds that, while banks remain relatively conservative in
terms of loan-to-value and maturities, ticket sizes have been
increasing in the past 12 months and single-bank loans of
€100 million or more are not uncommon.

He also notes that non-traditional investors, such as debt
funds, are stepping in to fill the gap in countries
– such as Romania and Hungary – where some
banks are still reluctant to lend.

In Russia, meanwhile, the effects of the economic slowdown
and Ukrainian crisis have yet to make a substantial impact on
the real-estate market, say analysts, due to the predominance
of local – including Commonwealth of Independent
States – money in the investor base.

A fall-off in flows has been seen. Whereas last year
Russia accounted for 52% of the total CEE investment market,
according to CBRE, compared with 30% for Poland, in the first
half of this year the two countries have seen roughly equal
levels of investment.

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